The year of COVID-19 was a difficult time for all. 2020 saw government-mandated lockdowns, a shift to virtual offices, and a health crisis that has not been experienced in many decades. While all industries had to adapt, some thrived – typically tech-centric firms that have benefitted from the ongoing digital transformation taking place. Investment crowdfunding is one of the industries that has not only survived but in some aspects has thrived. Anecdotal reports indicate that after an initial slowdown, investors and issuers returned to investment platforms in droves.
Today, Crowdfund Capital Advisors (CCA) has shared data pertaining to Regulation Crowdfunding or Reg CF in the US. The smallest exemption facilitating online capital formation, Reg CF allows issuers to raise up to $1.07 million from both accredited or non-accredited investors. An issuer must use the services of a FiNRA regulated funding portal or broker-dealer. But things are posed to change as beginning next month, issuers will be able to raise up to $5 million – a material update – that will benefit both issuers, platforms as well as investors.
According to CCA’s numbers, in 2020 capital commitments to Reg CF issuers rose by 77.6% from $134.8 million in 2019 to $239.4 million in 2020. The average raise increased from $298,331 in 2019 to $308,978 in 2020.
The number of investors participating in offerings jumped too. In 2020, there were over 150,000 investors, a 75% increase committing more than 358,000 investments versus the year prior.
The number of offerings rose by 61.2% tallying 1149 in 2020.
The average valuation of issuers went from $11.4 million to $13 million with an offering success rate of 63.7%.
The top 5 states for issuers, investments, and investors were: California, New York, Texas, Massachusetts, and Florida.
“2020 was a terrible year for our country. However, in the face of this health and economic crisis, the online finance industry enabled over 1,100 small businesses, across 48 states and territories, to raise USD 239,000,000 from over 358,000 investors in their communities. This capital was unavailable from traditional sources and provides a model for potential public-private partnerships to support small businesses in the future. Our data suggest these numbers could double in 2021.”
Crowdfund Insider contacted Neiss with several questions regarding the report as well as his expectations for the coming year. We asked if his data depicted a slowdown and then a significant rise in activity in the midst of the Coronavirus health pandemic.
Niess said Yes.
“Between February and March, when COVID hit and our economy shut down, there was a 25% decline in monthly offerings. Offerings stayed the same between March and April. But once the markets had stabilized (due to the first round of stimulus), we started to see an increase in monthly offerings. If you compare the 9 months prior to COVID to the 9 months into the pandemic, there was a dramatic 65% increase in the number of offerings. December was a record month for the most offerings in a single month since the launch of the industry; proving the need for capital by businesses.”
Neiss explained that when it came to investors there was a 6% drop-off between February and March. That turned around immediately starting in April with a 43% month-to-month increase in the number of investors.
“The average number of investors continued to increase, moving from an average of 23,000 investors per month pre-pandemic to 36,000 investors per month post the pandemic hitting. Digging into the data there was an overall 58% increase in the number of investors pre and post pandemic hitting, truly an amazing statistic given the hardship our economy faced,” said Neiss. “And finally, when you look at the dollars committed it is even more telling. From February to March there was a 35% drop in capital commitments, this also began to turn around in April with December once again seeing the highest number of investments in a single month ($35.5M). But the real story is that there was a 101% increase in capital committed 9 months into the pandemic (from $108.8M for the 9 months pre-pandemic to $219.1M for the 9 months into the pandemic).”
Neiss said that this means companies were desperate for capital and they turned to online to raise money mainly from people who had a pre-existing relationship with the firm:
“And those investors funded those businesses with more money than we’ve ever seen. As a matter of fact, the average check size increased from $541 in the 9 months prior to the pandemic to $691 nine months into the pandemic. So despite a crisis that took a huge toll on our nation, investors stepped up like we’ve never seen before with bigger checks to help support those businesses they believed in and ones they wanted to survive.”
We asked him about his prediction that Reg CF offerings will double in 2021. Is this due to new exemptions? Maturing platforms?
“It is a combination of things,” Neiss stated. “We believe the industry is maturing, which means that there is more awareness. We also believe that more investors are learning about the industry. So as friends, family, and customers become aware of this new funding mechanism as investors, entrepreneurs are also learning about it from those friends, family and customers. We also believe that the changes made by the SEC will shift the image of Regulation Crowdfunding as a financing tool for only small companies to larger ones that need in excess of $1 million in financing. This is also true for startups that wish to raise a Series A online rather than seek Venture capital. Adding all this together, we believe this industry is at a tipping point whereby 2021 will be the breakout year for Reg CF, offerings will double and we expect almost half a billion dollars to be invested.”
Currently, there are around 60 different funding portals. One industry insider believes about only 12 will survive. We asked Neiss his thoughts on this and whether, or not, the industry is poised for a period of consolidation?
“I think we are still in for a period of expansion before we have consolidation. The reason for this is that I think there is still room for platforms to emerge that wish to focus on verticals that we’ve seen in other industries (like P2P or P2B lending). I believe platforms will emerge that focus on women, minorities and veterans. Also now that the cap is increasing, I believe there will be more real estate plays in this space with platforms that focus on fix and flip projects emerging. Traction is key as the data shows. It is imperative that these new platforms come to market and execute on a focused strategy. The ones that don’t will just close shop. The others that start to gain traction will get the attention of the other platforms and we will see more of what Republic, NextSeed, and Fig have done.”
So what about niche platforms like Real Estate? Or debt? Other?
“Absolutely, I just mentioned real estate above but debt is another huge opportunity. I’ve been very impressed with what Mainvest, Honeycomb and the SMBX have been able to accomplish. Mainvest has seen a 300% increase in the number of debt offerings between 2019 and 2020. Honeycomb has seen an 83% increase and SMBX, which just launched in 2019, a 1100% increase. Obviously, smaller cash flowing businesses aren’t the right fit for equity offerings. These debt platforms will fill a huge void that exists in the capital markets for small businesses that are looking to borrow money,” Neiss said. “The positive thing is, these offerings are typically smaller in size which means that they are easier to fund. What our research has shown as well, is these debt offerings have a higher degree of entrepreneur/investor connectivity and offer attractive yields. I wouldn’t be surprised, as this part of the market scales, that institutions begin to follow alongside the crowd.”
As national elections are a hot topic right now, and the Biden Administration will take over later this month, we asked about a recent Tweet by him that indicates Democrat SEC Commissioners appear to want to keep smaller investors out of investing in crowdfunded securities.
“Based on my work in Washington, consumer protection groups have the ear of Democrats. Hence, I wasn’t surprised to hear those words come out of the Democrat SEC Commissioner’s mouth. That being said, I believe it shows unawareness of how this financing model works, how the investors are typically closely aligned with the businesses and/or entrepreneurs, and how small their average check sizes are (see the $691 figure above),” said Neiss.
He added that the data shows that individual investors aren’t risking their entire savings to support a local business they believe in. Neiss said the data actually shows the opposite, that a large group of local investors is pooling their resources together to see local businesses survive and thrive.
“Not to mention, these investors are now stakeholder and interviews with the issuing companies show that the investors turn into marketing/sales agents for the businesses. Annual reports filed with the SEC show an average 23% increase in revenues between the year a company closes a Reg CF round and the subsequent year. I’m not sure how you argue against this one when in fact, based on a SEC report, there’s been no fraud in this industry. The consumer protection advocates have a job. That being said, they should probably be focused where there are problems … like the public markets, investment advisor fees, management fees for index funds, etc. Consumers continue to be ripped off there.”
So how do we change the narrative that securities crowdfunding provides an opportunity for smaller firms as well as individual investors? And not just about investor protection….
“I think we need to wait for the first “big exit” of one of these securities crowdfunding issuers. There have been over 175 companies that have raised over $1 million via Regulation Crowdfunding offerings since the launch of the industry 4 years ago. Those companies have on average 1,900 investors from the crowd. One of these companies is bound to be bought for a big multiple (as we’ve seen happen in the UK and Israel). When that happens there’s going to be 1,900 investors that receive some pretty big checks. At that point, the media will be all over it and the focus will shift from investor protection to diversification and opportunity for smaller firms and individual investors.”
Neiss said that it would be a grave mistake for the incoming administration to apply stricter rules to crowdfunding as there has been zero fraud and tens of thousands of jobs have been created and small businesses have benefitted in over 450 different industries.
“Over 1,000 cities across the USA have been able to thrive because of this and local economies are the benefactors. Not to mention, in a report we wrote this fall, Regulation Crowdfunding by Congressional District: A Report Card it clearly shows that the majority of small businesses that have benefitted from Regulation Crowdfunding have been in Districts with Democratic representatives. So they would only be shooting themselves in the foot to apply stricter rules. We’ve written extensively about how our government hasn’t been able to get the stimulus money into the hands of the small businesses that need it. Rather than cause further damage to the economy by coming out with stricter rules, the incoming administration should learn from Regulation Crowdfunding’s success and figure out how to devise public-private partnerships that build off the successes this industry. It will help them achieve the goals they want: economic stimulus, democratization of capital, economic prosperity and job creation.”
Copies of the report may be purchased on the CCA website.